Funding a start-up: How to raise your first round
Jayan RamankuttyFounder/CEO YuMe NetworksBITSAA.org, June 25th 2006
Outline
Investment SourcesState of the VC IndustryFunding Process & Decision MakingSeed-Stage ValuationEntrepreneur’s checklistPreparing for the next step
Investment SourcesAngel Investors– Wealthy individuals with industry background– Usually a small investment (< $1M) in a very early-stage
company (demo, 2-3 employees)
Financial VCs– Most common type of VC, an investment firm, capital raised
from institutions and individuals– Fund sizes: ~$25M to 10’s of billions– Exit through - IPOs, Mergers and Acquisitions (M&A)
Strategic VCs– Typically a (small) division of a large technology company.
Examples: Intel, Cisco, Siemens, AT&T– Corporate funding for strategic investment– Not exclusively or primarily concerned with return on
investment
Sources of Funds
Source: Ten3 Coach
State of the VC Industry
Source: PWC NVCA Report Q1 ‘06
$0
$100
$80
$60
$40
$20
Tota
l In
vestm
en
t in
Billion
s
Investment # of Deals
1999-
8000
6000
4000
2000
Q1 2006 Investment of $5.6B for 761 deals
2000 2001 2002 2003 2004 2005
Investment reaches a state of equilibrium
State of the VC industry
Life Sciences
$1.5B
$5.6B, 716 deals in Q1 06
Software
$1.2B
Internet
$0.8B
Telecom
$0.6B
Media & Entt
$0.4B
$1.3B, 215 first-time financing deals
Source: PWC NVCA Report Q1 ‘06
Stages of fundingInitial Funding Stages
Pre-Seed A small amount of capital is provided to entrepreneur to prove a concept for a potentially profitable business opportunity.
Seed Financing is provided to newly formed companies for use in completing product development and in initial marketing.
First Financing is provided to companies that require funds to initiate commercial-scale manufacturing and sales.
Growth & Expansion Funding Stages
Second Working capital is provided for the expansion of a company to support growing accounts receivable and inventories.
Third Funds are provided for the major expansion of a company which has increasing sales volume.
Later Financing is provided for a company expected to "go public“ within six months to a year.
Investment Criteria
Criteria Ranking by Angels
Ranking by VCs
Trustworthiness of the entrepreneur (s) 2 1
Enthusiasm of the entrepreneur (s) 1 3
Expertise of the entrepreneur (s) 4 2
Sales potential of the product 3 5
Growth potential of the market 6 6
Perceived financial rewards 8 4
Investor liked entrepreneur (s) upon meeting 5 9
Quality of product 7 10
Track record of the entrepreneur 9 8
Expected rate of return 10 7Source: Ten3 Coach
Opportunity Evaluation
6 in 1000 business plans get funded on an average5% of business plans are read beyond the executive summary10% of proposals pass initial screening10% of pre-screened proposals pass due diligence & receive funding
2. Initial Screen2. Initial Screen1. Opportunity Introduction
1. Opportunity Introduction
StartStart
3. Due Diligence3. Due Diligence
•Management Team•Business Plan
•Management Team•Business Plan
•Valuation•Ownership•Control•Mgmt•Legal Contract
•Valuation•Ownership•Control•Mgmt•Legal Contract
4. Negotiation4. Negotiation
•Presentation•Exec Summary•Milestones•CF forecast
•Presentation•Exec Summary•Milestones•CF forecast
FUNDINGFUNDING
•Mgmt, Personnel•Marketing•Production•Financials•References
•Mgmt, Personnel•Marketing•Production•Financials•References
Seed Stage Valuation
Historically seed stage funding is limited to $1M+ (higher risk – lower funding)Seed valuations tend to be subjective– Quality of the leadership– Strength of intellectual property– Time-to-market expectations– Cap-ex and burn rates expectations– Sector volatility
Financial Chronology of Amazon.com
Source: Ten3 Coach
Entrepreneur’s checklist
Understand short-term and long-term financial needs of the companyProvide accurate forecasts of revenue, market share and marginsHave clear milestones for developmentUnderstand selling and buying processUnderstand competition and market trends
Preparing for the next step
First “big” round of financing (> $3M)Financing dependent on progress made with seed capitalBefore Series-A– Assemble a quality team– Meet development milestones and
targets• Develop “proof of concept”
Upcoming BITSAA events
Plan E Educational Events
Mission– Provide a forum for building relationships
between aspiring and successful BITSian entrepreneurs
– Stimulate entrepreneurial thinking amongst BITSians
Objectives– Conduct ten or more educational cum networking
events by May 2007 – Attract five BITSian startup ideas for an idea
pitching event by May 2007
Plan E Educational EventsEvent Format– Each event will have one theme/topic and will have one
to two speakers or three to four panelists to cover enough breadth as well as potentially differing viewpoints
Next Event– Topic
• From idea to success: The Pinnacle Systems Story: From start to $350 million and a successful exit
– Speaker• Ajay Chopra, Venture Consultant - Trinity Ventures,
Founder - Pinnacle Systems– Date
• Jul 15, 2006